Lou’s preferences over pizza (x) and other goods (y) are given by U(x, y) = 2xy2. His income is $200. a) Calculate his optimal basket when Px =4 and Py = 1. b) Calculate his income and substitution effects of a decrease in the price of food to $2. c) Calculate the compensating variation of the price change. d) Calculate the equivalent variation of the price change.

Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter20: Consumer Choice: Maximizing Utility And Behavioral Economics
Section20.2: Consumer Equilibrium And Demand
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Lou’s preferences over pizza (x) and other goods (y) are given by U(x, y) = 2xy2. His income is $200.

a) Calculate his optimal basket when Px =4 and Py = 1.

b) Calculate his income and substitution effects of a decrease in the price of food to $2.

c) Calculate the compensating variation of the price change.

d) Calculate the equivalent variation of the price change.

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